Monday, April 11, 2016

Will Oil Double By Year-End?

Pierre Andurand, a hedge-fund manager who predicted the oil collapse, said crude is starting a "multi-year bull run" because low prices have curbed supply.

Crude futures, currently trading near $US40 a barrel, will rebound to $US60 to $US70 this year and $US80 in 2017, the chief investment officer of London-based hedge fund Andurand Capital Management LLP said in a newsletter to investors. A spokesman for the money manager declined to comment.

"Large spending cuts are taking a toll on operational maintenance," according to the newsletter, which was dated February. "After having been in an oversupplied market we expect inventory draws to start in a few months and accelerate quickly."

Oil has slumped about 60 per cent since mid-2014, prompting companies to lay off workers, cut investment and cancel projects. While prices have rebounded from a 12-year low reached earlier this year on speculation the surplus is easing as US output declines, stockpiles in the world's largest oil-consuming nation continue to grow.

The $US710 million Andurand Commodities Fund gained 3.5 per cent in the first two months of the year, while Brent crude futures, the global oil benchmark, lost that amount in the period. The S&P GSCI Crude Oil Total Return Index declined 18 per cent. The Andurand fund added 4.1 per cent in 2015 and 38 per cent in 2014, according to the investor letter.

OPEC leader Saudi Arabia has already achieved its objective of curbing supply growth from rivals, and its diplomatic efforts with fellow producers may be aimed at averting a price surge in coming years as production falls short of demand, according to the newsletter. Most members of the Organisation of Petroleum Exporting Countries will meet with Russia on April 17 in Doha to complete an accord to cap oil production, an initiative that has helped revive prices.

"It is possible that the Saudis are now less worried about short-term downside risk than medium-term large upside risk," Andurand wrote. The kingdom, which "does not want crude oil prices to spike", has realised that the slump in later-dated futures prices "has created a significant supply gap in the years to come".

If you’ve read our daily notes for the past few months, you’ll know how important oil is for global markets at this stage. Even after a 50% bounce, if you were told what oil did on the day, you would probably have a good idea what stocks, interest rates, currencies and other commodities did as well.

With that in mind, two of the best oil traders in the world that have been calling for oil prices to rise back to $70. Both Andy Hall and Boone Pickens continued to make their case, even as oil broke below $40 and then $30.They have more company. Pierre Andurand, a former Goldman Sachs oil trader and manager of the hedge funds Andurand Capital and BlueGold Capital, has not only called a bottom in oil, but believes oil will trade back to $80 a barrel, more than 100% higher than current levels.

Andurand has made a killing trading oil in his hedge funds, returning 36% annualized net of fees since 2008. And he has a very high batting average on calling tops and bottoms.

He started his hedge fund BlueGold Capital in 2007. He made 210% in 2008 shorting oil at its all time high, then in 2009 he went long oil and put up 55% for the year.

He shorted oil again in 2014 near the top, when oil prices collapsed from over $100 to below $50 — he made almost 50% that year. In 2015 Andurand stayed short oil and was right again. He made 5% net of fees, in an extremely tough trading year.

In 2016 Andurand said oil would bottom in late January of this year and again Andurand was close to being spot on. Two weeks later oil bottomed at $26 and shot up to $42 in a month.

So now he’s predicting a double by next year for oil prices. He says oil has bottomed because there is very little spare capacity in the system” and says low prices have curbed supply. He expects inventory draws to start in a few months and “accelerate quickly.” He thinks $70 this year, and $80 next year.

"I think much lower oil prices will plant the seeds for the next big bull run, but I think it will be for 2017-2018. Eventually by 2018-2019 I think prices could make new all-time high. That is why I am optimistic about trading opportunities in oil markets, as there will be more volatility and larger moves than in the past thanks to OPEC letting prices balance the market."

There are other respected oil analysts who are also calling for a big jump in oil prices this year. Mike Rothman at Cornerstone Analytics – a macro energy research firm that has produces some of the most accurate data out there – is calling for oil to hit $85 by Christmas.

A big jump in oil also bolsters the fortunes of hedge funds that bet big on a global recovery as you will see energy (XLE), oil exploration (XOP), metal and mining (XME) and emerging markets (EEM) shares continue surging higher even after making explosive move from their bottoms in late January.

It's very simple: if you believe oil is heading to $85 by the end of the year and then it's going to make new all-time highs by 2017-2018, you better be long commodity currencies like the Aussie and loonie and even emerging market currencies like the Brazilian real. You should also be long energy and commodity stocks too.

I remain highly skeptical on oil and commodities for many reasons. With many nations mired in deflation and the global recovery in danger of stalling, it's hard to see significant changes in the demand for oil over the near term but I will admit that supply shocks could figure in prominently, especially if global growth surprises to the upside in the months ahead.

Analysts, oil buyers and speculators will be watching the Doha meeting mainly to see whether the 13 members of the Organization of the Petroleum Exporting Countries and Russia show signs of being able to cooperate enough to exercise market discipline — and maybe even to cut production at some point, if necessary, to bolster oil prices.

“A freeze is laughable, given that Russia is at a post-Soviet high and Saudi Arabia is producing 10.2 million barrels per day,” said Robert McNally, president of the Rapidan Group, an energy consultancy based in Bethesda, Md. And yet, the mere talk of a freeze, he said, “has worked spectacularly, at least initially.”

Many analysts say that a freeze, if agreed to, would have little impact on the estimated one million or more barrels of excess oil that each day is pouring into already brimming storage tanks and tankers around the world.

Mr. McNally, who served as a White House energy adviser during the George W. Bush administration, says an output freeze would be “a very poor cousin” to some earlier efforts by oil producers to manage supply. That includes the substantial cuts by OPEC members in 2008.

This time Saudi Arabia, which would probably need to make the bulk of any OPEC cuts, has adamantly refused to do so on its own.

Mr. McNally and other analysts speculate that the oil producers hope a freeze agreement would be sufficient to shore up prices until gradually growing demand catches up with supply — which many forecasts say will happen either this year or in early 2017.“Once we get into the summer, falling supplies will come to dominate the market,” said Richard Mallinson, an analyst at Energy Aspects, a market research firm based in London.

OPEC countries are also hoping that the price-pressured cuts in production by some energy providers, like smaller shale-oil drillers in the United States, will help reduce the surpluses. So might the eventual impact of big oil companies’ postponing hundreds of billions of dollars’ worth of projects in response to low prices.

The main goal of the Doha meeting seems to be assuring markets that countries whose economies depend on selling oil can still find ways to collaborate.

All this to say when it comes to oil, it's still a crapshoot. In my next comment I will discuss currencies and carry trades dominating the global landscape. It's very important to understand the macro crosscurrents because there are a lot of moving parts to what is going on and as I keep warning, if you get your macro calls wrong, you're toast in this environment.

Also, while some think oil will double by year-end, others are fading this rally. The low of the year for U.S. crude prices may not be in yet, oil expert John Kilduff said on CNBC. The same goes for oil analyst Tom Kloza, the man who called oil's fall and now thinks people shouldn't get too excited about the oil rally. Listen to their comments below because if they're right, energy, commodity shares and currencies are in big trouble.

And CNBC's Bob Pisani discusses why the markets may be decoupling from oil. The broader trends of a weaker U.S. dollar, supply constraints and OPEC have impacted oil prices lately but will this be enough to see oil prices double by year-end?

That remains to be seen because while a decline in the U.S. dollar supports commodity prices, it presents huge challenges to the global economy. That's a topic I will cover in my next comment.

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